Cyprus "Deposit Tax"

JoeNCA · Post by **JoeNCA** » Mon Mar 18, 2013 10:15 pm

While it is true that so long as the bank keeps on raising the credit limit, one can continue charging the card beyond the original card limit but this doesn't mean debt isn't there.
As long as goods and services are exchanged with currency as medium of exchange, accumulating debt will have serious real life consequences.
Money is an artificial construct until there is a war.

Felix · Post by **Felix** » Mon Mar 18, 2013 10:17 pm

@JohnnyH: How does someone who holds an account in Cyprus not play the game? My point is similar to Paul Watzlawick's "You can not not communicate.": You can not not engage in politics.
Don't get me wrong here. I LOVE the idea of being away from politics. I have this idea of just having a farm with some chickens, fruit trees and veggies etc. You get what you grow and nobody can take it away, money is unneccessary etc. But even then I need to pay property taxes, sales taxes on barter deals and so on. I don't think one can escape the grip of this. Death and taxes as they say.
I guess countries like Spain got the short end of the stick when joining the EU:

http://www.creditwritedowns.com/2010/05 ... -zone.html
Yes, iceland was great, I also like this journalist: https://www.youtube.com/watch?v=HAf7J4a_T1g

simplex · Post by **simplex** » Mon Mar 18, 2013 11:03 pm

Hi, I also think that Iceland did a quite good job of getting rid of its debt. But what they did was to hold the bankers and banks accountable, not the account holders. And Iceland did get loans from NL and UK to pay the deposit guarantee scheme. They let the banks go bankrupt, except for the domestic part. And after that they again lived by exporting fish and energy+aluminum.

However the problem with Cyprus is that it does not export anything except banking services. And they took on a lot of debt under British law, so they can't just pay back in Cyprus money.

So in that way I think the EU bail-in (or out) is a better option for the Cyprus people. But that still leaves the main question: Why don't let the banks go bankrupt? The money is still in the accounts, even if the banks are bankrupt. Only the obligations of the banks will all be worthless.

Felix · Post by **Felix** » Mon Mar 18, 2013 11:12 pm

@simplex: From my understanding there is no money in the accounts in terms of cash in a piggybank. This means the "money in the accounts" are liabilities of the banks. If they go belly-up, so do the accounts.

simplex · Post by **simplex** » Mon Mar 18, 2013 11:21 pm

Yes, the money in the accounts are liabilities of the banks to the account owners. However there must be other liabilities TO the banks balancing the accounts (i.e. loans given by the banks) AND additional money of obligation holders and the owners of the banks. So in my view, first the owners of the banks and the obligation holders should loose their money (they were investors). Probably then there is still not enough money, and here a bail-out can help (and the Cypriots should decide on this). But my problem is why take money from an account holder and not from the bank investor who obviously made a bad investment and with the current scheme still gets his money back?

Felix · Post by **Felix** » Tue Mar 19, 2013 12:09 am

That's a very good question, simplex.
I think this article sheds some light on that:

http://www.nakedcapitalism.com/2013/03/ ... t-2-0.html
The relevant part starts with
"Now to the obvious question: why are depositors, the folks most senior in the creditor hierarchy, being whacked? Shareholders and bondholders should be wiped out before they lose a penny. Yes, but this is a case where expediency, unwisely, has been allowed to carry the day."
Basically, there's little equity or senior debt on the bank's balance sheet. What's left besides deposits is central bank debt. One would need to restructure souvereign debt and let the holders of that take the hit. They seem to have the upper hand in this, though, as they have a debt deal under English law and are willing to take legal action to get their share - unlike Cyprus' average joe account owner. Again, this seems to be power politics.

I'm still trying to wrap my head around the details of this ...

George the original one · Tue Mar 19, 2013 8:33 pm

Cyprus has called the bluff and rejects the tax.

Chad · Post by **Chad** » Wed Mar 20, 2013 1:02 am

Every plane out of Moscow to Cyprus is full.
In the end, this really a tax on the Russians.

secretwealth · Post by **secretwealth** » Wed Mar 20, 2013 1:17 am

I heard today there's talk of a Russian natural gas company giving the Cyprus banks billions in exchange for sole rights to their gas deposits.
This mess is basically robbery. Cypriots need to stage a coup or the government needs to throw out the PM and/or leave the EU. This whole situation is a joke.

Post by **jacob** » Wed Mar 20, 2013 1:55 am

I'm losing my faith in humanity ... Here are the outcomes.
Facts: These banks are mainly funded by deposits, not bonds or equity. These banks are also underwater. Therefore, they owe money they don't have and it's due now.
More facts: Bank deposits are liabilities! They are, however, so senior that most people expect to always get their savings out no matter what. But... as people really ought to know: Banks don't hold your money when you give it to them. Rather you lend it to them. If they lose it ... well .. (and that's why bank ratings matter!)
1) The depositors take the hit. (This is the "fair" solution, that is, the already agreed upon one.)

2) Renegotiate the terms on the lending. (This is the political/propaganda/PR solution. Mainly because despite the contractual setup, depositors actually taking a hit on their liabilities (their bank accounts) messes which the "popular understanding" of a bank accounts, which albeit deluded, is a political liability.)

3) The banks fold and the depositors lose a lot more than the tax that would ensure a bailout.

4) Someone else bails out the banks.

BennKar · Post by **BennKar** » Wed Mar 20, 2013 1:57 am

My understanding is the Russians made the offer for their gas some time ago and Cyprus rejected it, and will most likely continue to do so because financially it is even worse than the bailout offer. I don't know how this will play out, but it should be interesting. On that same subject, I don't know why an American firm hasn't made a better offer to Cyprus for drilling rights. It would have to be better than working with Venezuela or other narco (err... OPEC) states.

Post by **jacob** » Wed Mar 20, 2013 2:01 am

Same old story ... just on a different scale.
People living above their means. Then their debt comes due and there's a fire sale on their assets wherein those who previously lived below their means get a good deal.
In the long run it [hopefully] all evens out.
Only the details differ.

secretwealth · Post by **secretwealth** » Wed Mar 20, 2013 2:19 am

Except it wasn't the Cypriots living above their means--it was the Cypriot banks who got drunk on dirty Russian cash.

secretwealth · Post by **secretwealth** » Wed Mar 20, 2013 2:21 am

@jacob: you're forgetting about depositor insurance, which I seem to remember reading existed in Cyprus--and which the Cypriot government essentially nullified/reneged on with this deal.

Post by **jacob** » Wed Mar 20, 2013 2:30 am

In that case ... the banks are bankrupted and put into receivership. The depositors initially cover the losses to the creditors as per their agreement. Then the depositor insurance company covers the depositors as per their agreement. Case closed.
The current brouhaha sounds like political horse trading.
Anyway ... I guess the useful lesson to come out of this is that no deal is guaranteed. Any relation involving money is only good insofar that both parties keep agreeing on it. While normally such deals are enforced by the government under typical punishments that exceed assault and murder, when one party becomes the government, it's different.
http://www.youtube.com/watch?v=jsW9MlYu31g

secretwealth · Post by **secretwealth** » Wed Mar 20, 2013 2:52 am

"I guess the useful lesson to come out of this is that no deal is guaranteed."
Well...in Europe. All that European smugness about how uncivilized/barbaric/untrustworthy the rest of the world is has really shown itself up. I think this whole snafu is going to be a huge surprise upside for the U.S.--all those scared wealthy Europeans are going to withdraw and dump money somewhere where deposits are secure: the U.S. I'm still trying to figure out what this will do to stocks and government bonds stateside, but I could see both going up.

secretwealth · Post by **secretwealth** » Wed Mar 20, 2013 3:01 am

"I guess the useful lesson to come out of this is that no deal is guaranteed."
Well...in Europe. All that European smugness about how uncivilized/barbaric/untrustworthy the rest of the world is has really shown itself up. I think this whole snafu is going to be a huge surprise upside for the U.S.--all those scared wealthy Europeans are going to withdraw and dump money somewhere where deposits are secure: the U.S. I'm still trying to figure out what this will do to stocks and government bonds stateside, but I could see both going up.

Dragline · Post by **Dragline** » Wed Mar 20, 2013 3:02 am

Gold and US Govt long bonds seem to have been the most immediate beneficiaries of this mini-crisis (and the dollar as compared to the euro).

secretwealth · Post by **secretwealth** » Wed Mar 20, 2013 3:20 am

Since the beginning of the week, gold's up about .8%, TLT up almost 2%, BLV's up 1.5%.